Malaysia Manufacturing - Manufacturing Sector Stays Weak in January

● Malaysia’s manufacturing PMI continued its downtrend for the fourth straight month in January. At 47.9 (Dec: 46.8), the sector kickstart with a contraction in the first month of 2019. Although the PMI edged higher from the preceding month, readings below 50 indicate a decline in manufacturing activity. According to IHS Markit, the month’s weak PMI reading was associated with a decrease in output and new business while export sales dropped due to weak demand from China, Japan and South Korea.

● Purchasing activity declined as lacklustre business environment prompted lower input buying. Consequently, production output fall but the rate of contraction eased since December. Additionally, stocks of manufactured goods were used to clear outstanding orders leading to a scale down in inventories. We expect the deterioration in manufacturing activity to persist in a near term due to a slowdown in China’s economy and uncertainty in the trade talks between the US and China although both countries have shown positive progress to end the trade war.

● Operating expenses fall for the first time in four years amid an increase in employment. Meanwhile, firms continue to raise prices mainly attributable to increase in labour cost following the implementation of the new minimum wage rate, which rises to RM1,100 from RM1,000 (Peninsular Malaysia) and RM920 (Sabah and Sarawak). Nevertheless, we expect inflation would remain modest and project the CPI to be within a range of 1.0% to 1.5% in 2019 (2018: 1.0%), due to weaker global growth and lower crude oil prices.

The latter will partially offset inflationary pressure emanating from cost-push inflation due to the floatation of domestic fuel prices starting from 2Q19 and low base effect arising from the tax holiday period in June to August 2018.

● Mixed manufacturing conditions were observed across regions. US manufacturing PMI improved to 54.9 (Dec: 53.8) driven by an expansion in production, new orders and hiring which signalled a steady and faster improvement in the overall health of the sector. In the UK, manufacturing PMI fell sharply to a three-month low of 52.8 (Dec: 54.2) as trends in output, new orders and employment slowed. However, input buying activity and stocks of purchases increased in preparation for Brexit. Meanwhile, the manufacturing PMI in South Korea continue to fall, registering 48.3 (Dec: 49.8) its lowest in more than two years due to sluggish domestic demand and weak export sales. Within ASEAN, Thailand’s manufacturing PMI eased to 50.2 (Dec: 50.3) but reflect an expansion for the sector thanks to an increase in output and exports albeit slower. Meanwhile, Indonesia’s manufacturing PMI edged lower to 49.9 (Dec: 51.2) as new orders declined. Overall, manufacturing activity in ASEAN slipped to 49.7 (Dec: 50.3) pointing to a sluggish start for the year.

● With global demand and commodity prices waning, Malaysia’s manufacturing activity and exports are expected to remain weak. Hence, a slower growth trajectory would be more realistic for 2019 in line with our GDP projection for Malaysia at 4.7%. Meanwhile, GDP growth is projected to have moderated in the 2H18 to 4.7% from 4.9% in the 1H18, bringing the 2018 growth to moderate to 4.8% from 5.9% in 2017.